India’s latest GDP estimates have brought both cheer and surprise. Fourth-quarter growth at 6.1 percent completely defied market expectations, which were much lower for two reasons.
One, manufacturing, which had seen a contraction in the second and third quarters of fiscal 2023, was expected to have seen continued deterioration with a further drop in merchandise exports. Additionally, the sector was also expected to reflect the negative impact of high inflation and rising interest rates on consumption demand, particularly for goods. Instead, the sector saw a recovery with growth coming in at 4.5 percent, driven by easing supply-side bottlenecks in production. Two, agriculture sector growth estimates, too, showed better-than-expected performance despite heatwaves and other climate disturbances.
Building Blocks For Growth
But one sector where robust growth was not a surprise was construction. It grew 10.4 percent year-on-year during the quarter, after cementing 8.3 percent in the preceding quarter. With government spending on infrastructure remaining strong, this sector has been one of the strongest to recover post the pandemic and amid geopolitical challenges such as rising costs and input shortages. In fiscal 2023, the construction sector was 3 percent above its pre-pandemic trend, which is the level where the economy would have been had the pandemic not hit. In contrast, manufacturing is nearly 3 percent below that trend level.
From the expenditure side of the economy, too, this non-uniform pattern of catch-up is visible with fixed investment only 2.7 percent and consumption 7 percent below the trend level. Going forward too, we expect investment to continue playing a big role in driving growth with some underlying changes expected.
So far, the government has been dominant in driving investments while the private sector, despite improved balance sheets, is cautious to invest given the global headwinds and sluggishness in consumption. Over time, however, private sector should start taking on more investments.
Boost From Infrastructure Spending
Several factors can support a gradual, but steady, pick-up in corporate investment. Crucial among these are deleveraged corporate balance sheets and enhanced bank appetite to lend. CRISIL Research believes that while industrial capex will get a push from government policies and new-age opportunities, infrastructure spending will continue to drive a large part of the growth in capex this fiscal, given targets under the National Infrastructure Pipeline.
Another push to capex is from the green transition imperative where sectors like power and transport are taking the lead. At present, nearly 9 percent of the spending in both infrastructure and industrial capex are green. This is expected to rise to 15 percent by fiscal 2027.
In the coming months though, external demand is likely to be a bigger hindrance to growth with India’s major trading partners staring at a growth slowdown. Domestic demand is expected to see some weakening, led by higher cost of borrowing, However, softer inflation and continued government capex should offer some support. In fiscal 2024, we expect GDP growth to slow to 6 percent from 7.2 percent in fiscal 2023. Beyond that growth should rise to about 6.9 percent and then moderate over time to average about 6.8 percent in the medium term.
Looking into the future, a few interesting themes seem to dominate India’s growth landscape. Domestic factors will continue to play a bigger role in the short term, though global shocks can constrain the upside. In terms of capex, the stage is set for a revival with government infrastructure spending strong along with policy nudge to sectors, lighter corporate balance sheets, stronger bank balance sheets which has improved their ability to lend and an overall sturdier financial system.
Efficiency Gains Critical
Over the medium term, capital or investments will remain a key driver of growth. But the role of efficiency gains in driving medium-term growth will remain critical. So far some of the reform measures announced have begun to yield some returns (such as the Goods and Services Tax where there is better compliance) but most remain work in progress and will aid growth over time.
The focus on transport infrastructure such as rural roads, highways and railways will enhance physical connectivity. This along with continued rapid progress in digital and financial connectivity should culminate into better efficiency gains.
The changing global world order sees India as an offshoring destination with stable and supportive policy environment. But this is not a given unless we work harder on ironing out some of the less addressed issues pertaining to land acquisition, labour availability, and skill development. Sectors such as exports and agriculture have also waited long to see focused policy intervention that can raise their long-term growth potential. The time is ripe, and the time is now.
Dipti Deshpande is Principal Economist, CRISIL Ltd. Views are personal, and do not represent the stand of this publication.
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